Another strong sell-off in Asia overnight is once again spreading fear throughout financial markets at the start of the week, piling the pressure on the People’s Bank of China to inject some stimulus into the markets stop the rout, at least for now.
There doesn’t seem to be any particular catalyst for the intense panic selling that we’re seeing, instead it’s simply a case of fear breeding fear. Regardless, the result has been quite devastating for the markets, with the Shanghai Composite down almost 9% having wiped out all of its year to date gains, while European and US futures are deep in negative territory which suggests it’s going to be a long and chaotic day.
The Dow and Nasdaq on Friday entered correction territory, with the former doing so for the first time since 2011. In many ways, a correction for the first time in four years is healthy for the markets, but the manner in which its come means much larger losses could follow.
It all seems to stem from China where panic selling is has taken over. The PBOC was expected to step in over the weekend and cut rates but instead authorities announced that pension funds will now be allowed to invest in the stock market for the first time, potentially injecting hundreds of billions of Yuan into the markets. Ordinarily this would have had a very positive impact on the markets but clearly, there is nothing ordinary about these market conditions.
With all of this market volatility and panic coming from China, it seems any hope of a rate hike from the Federal Reserve in September have been well and truly dashed. I can’t imagine policy makers wanting to step in and potentially make matters worse. They will surely want to analyze the market impact of these moves in the emerging markets thoroughly before doing something that could potentially set them off again.
Still, it will be interesting to get their interpretation of events this week with a number of policy makers due to speak. At the end of the week we have the Jackson Hole Symposium, an event the previous Fed Chairs have used to warn the markets of impending monetary policy changes. Unfortunately Chair Janet Yellen will not be appearing this year which suggests no such warning will come, although we will hear from Vice Chairman Stanley Fischer who may be able to offer some insight.
The FTSE is expected to open 173 points lower, the CAC 145 points lower and the DAX 333 points lower.
For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-events/